Australia: The AUD has been the beneficiary of global central bank and institutional buying in recent weeks. This has been due partly to Australia's relatively higher interest rates and yields on Commonwealth and state government bonds as compared to other developed economies.

It has also been a "nod" in our direction on a sovereign level. Interstingly, this trend modestly weakened Friday night. After touching 1.0600 within the past two weeks, it appears we are headed for 1.0400 as this slows and importantly, the prices of many commodities exported from Australia weaken in price (most notably iron ore and coal).

Expect the AUD to move sideways in the short term. We expect the market to gain little new insight from tomorrow's release of the RBA minutes from the meeting earlier this month.

Although there have been calls for the RBA to intervene in the foreign exchange markets to lower the value of the AUD, the RBA has made it clear that intervention to lower the currency has only a small and modest short term effect and that all businesses need to adapt to a changing financial world.

Comments from the Treasury recently reveal that a more effective way might be to lower interest rates rather than consider direct intervention. On Friday RBA Governor Stevens will testify before the House of Representatives Economics Committee.

Majors: Equity markets in the major economies all registered small gains on Friday with the Dow and S&P 500 all up 0.2% after the German DAX and Euro Stoxx 50 rose 0.6%. Oil was up slightly by less than 1% to US$96 a barrel for WTI crude after the University of Michigan's projected confidence survey for August was higher than expected (73.6 vs. the 72.2).

On Wednesday, analysts will be reviewing the latest FOMC minutes for further hints of further possible quantitative easing by the US Fed. Over the weekend the German magazine Die Spiegel reported that the ECB may be considering buying a country's sovereign bonds once an upward yield limit has been reached.

Later this week German Chancellor Merkel will meet with French President Holland on Thursday and the next day with the Greek Prime Minister. We generally see a subdued week of trading ahead as the Northern Hemisphere economies focus more on summer holidays rather than the machinations of the financial markets.
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